Own-to-Rent

Credit is due to Marketplace for a recent story about "own-to-rent" legislation, which would allow people to continue living in their houses, even in foreclosure.

The simple way is, Congress passes legislation and says the current homeowner has the right to stay in the home as long as they like. All they have to do is pay fair market rent. And of course under this plan, the homeowners turn over the property to the mortgage holder. So the mortgage holder does get the property, and it's a bailout that really protects the low-income homeowner who was sold a bill of goods.
- Chris Farrell, Marketplace

Dean Baker explained this idea, in detail, over at TPM Cafe.

Here’s how the plan works. Currently, if a homeowner is not able to make their mortgage payments, the holder of the mortgage can go to court to place the house in foreclosure. At that point, if the homeowner is not able to come up with back payments on the mortgage, or work out an acceptable arrangement with the mortgage holder, the bank or financial institution that holds the mortgage retakes ownership of the house and can have the homeowner evicted.

Under this security of housing proposal, the foreclosure process would be changed so that the current homeowner would have the option to remain in their house as a renter paying the fair market rent. If a homeowner chose to go this route, the judge in the foreclosure proceeding would appoint an independent appraiser to determine the fair market rent for the house. This is similar to the process a bank undertakes when it hires an appraiser to determine the value of the house before issuing a mortgage, except the appraiser will be asked to determine the rent rather than the sale price.

This idea is a great one. It helps manage the housing problems currently facing many of our neighbors and accomplishes three important goals.

First, it insures that people are not immediately forced out of their homes in foreclosure. There are few things more detrimental to a community, and a family, than a sudden loss of a home, and thus a neighbor. Foreclosed houses which remain empty become eyesores and targets for petty crime. And for the families forced to leave their homes, with their lives in financial ruin, a vicious downward spiral is often the next step. This proposal at least gives them an opportunity to stay in their house as they put their financial lives back together.

Second, it puts the burden of dealing with the foreclosure crisis on the people who caused it - overexuberant lenders. Just like the dot.com bust of 2000-2001, the below-prime mortgage meltdown was the result of speculation and lax financial oversight. And the lenders knew the risks, so they should pay the price.

PMI recently sent new underwriting rules to its lender network, tightening up on the number of mortgages -- and dollar risk exposure -- loan applicants are permitted to present to the insurer. Individual loan applicants no longer will be permitted to represent greater than $350,000 worth of total loss exposure to PMI, nor to have more than four PMI-insured low-downpayment loans.
- Kenneth R. Harney, March 21, 2005

In 2005, the industry knew about the risks, but their answer was to limit individual applicants to four low-downpayment loans each. Only speculators have need for four low-downpayment loans. The lenders who enabled the speculative bubble should pay the price, and that means accepting rent, instead of resale, of the houses they suddenly own in foreclosure.

Third, this plan creates the right kind of incentives. It brings the debtor and the lender to the table to look for a solution. The problem is that the debtor cannot pay the full amount of the debt, but probably does not want a foreclosure on their credit report. Banks, as a rule, do not want to become landlords, but do want some compensation for the debt. The solution may be the lender accepting less in return for not having to become a landlord. This plan gives both sides a reason to come to a deal before an actual foreclosure happens.

Dean Baker gets the last word.

The point here is simple. We can design a mechanism that will directly benefit millions of moderate income homeowners who are struggling to hang on to their homes. Or, we can come up with schemes that will benefit the banks and hedge funds who speculated in mortgage debt. Place your bets.